APR 7, 2016 (SpillingTheBeans)–Active May Arabica coffee futures closed weaker on Thursday, settling 1.70 cents lower at $1.1980 cents per pound at the ICE futures exchange in New York, as the market brushed off mounting evidence of a new 2016-17 harvest in Brazil that is far from producing the alleged “record crop” that some traders want you to believe. This disappointing performance has forced us to ask the following question:
*Has the coffee market gone mad?
Sure, we are well aware of how a weak Real in the currency market in Brazil, the largest coffee producer and exporter in the world, have caused a frenzy in local coffee selling with everybody from producers to exporters selling whatever stock they have been able to dig out of warehouses across this nation in order to cash in on the price bonanza. But we repeat, the large export volumes seen in the last year is NOT the result of a big or better than expected crop, but only the result of huge stocks being sold off.
We are also well aware of the many analysts and industry officials who since January have been praying the lofty promises of the new 2016-17 harvest producing a bumper crop, with some of the more irresponsible trading houses even calling for a record crop.
These figures are so ludicrous in how far they are from reality — and in the end, the ones in this market who will be hurt the most by the continuing denial of basic crop fundamentals in Brazil and elsewhere in the world of coffee, are the roasters and importers currently buying coffee below the cost of production.
The story of how low coffee prices affect growers is pretty simple and straight forward: When coffee prices fall below the cost of production, farmers — who every 5 to 10 years see their land unit per family cut in half because of population growth — will dedicate continuing less time and zero inputs such as fertilizer into the farm plots. As a direct result of this, an estimated 70 to 75 percent of the world’s entire Coffee Park is today in a state of semi or complete abandonment, producing less than 5-6 quintals (100-pounds bags) per hectare. This is clearly not sustainable, nor a situation that provides for a viable future supply line in a market where global coffee consumption expands by 3 to 4 million bags a year.
The ramification of this should not be too difficult for interested parties to understand, and even more importantly, Brazil is NOT going to be able to make up for the shortfalls in production elsewhere. As we have seen for the past consecutive 2 years and 3 crop cycles – and this next 2016-17 harvest will be the 4th in a row – the severe negative impacts of climate change has made it impossible even for Brazil to keep up with production.
The last 2015-16 harvest in Brazil ended at a little over 43 million bags yet total exports from that cycle are seen reaching up to 34 million 60-kilogram bags. Add to this the domestic market that consumes 21 million bags, and the raw fact is that Brazil produced a DEFICIT of at least 12 million bags.
With the new 2016-17 coffee harvest in Brazil unlikely to surpass 50 million bags — and we are being REALLY optimistic here — that means either Brazil will have to cut down its export volume to well below 30 million bags or we can expect to see Brazil launch MASS importing of coffee from other nations to meet local demand.
Sure, this current situation allows for an interesting market to watch — just don’t forget that we are playing around with the day-to-day life of MILLIONS of small-holder coffee producers across the world.
As always, we welcome your comments!